As a small business owner, planning for retirement and handling your estate can feel like a daunting task. This blog post will delve into three crucial aspects of this intricate journey.
Preserving Your Assets
Running a business as a sole proprietor means that your personal assets are linked with your business, exposing them to potential legal threats. Two asset protection strategies predominantly used by small businesspeople are the limited liability company (LLC) and the family limited partnership (FLP).
Limited Liability Company
An LLC provides a degree of protection by separating your personal assets from your business. If a legal claim is made against your business, in most situations, your personal property is safe and vice versa.
However, this protection isn’t foolproof. For instance, if you personally secure a business loan or are held liable for damages while executing your duties as an LLC owner, your personal assets could be at risk.
Apart from asset protection, an LLC offers the advantage of simplified taxation. Business profits and losses are declared on your personal income tax returns, ensuring streamlined accounting and single-layered taxation.
Family Limited Partnership
Another effective asset protection strategy is the FLP. As a general partner in an FLP, you hold the decision-making power, while family members can join as limited partners. Like an LLC, assets held by the FLP are separate from the partners’ personal properties.
To illustrate, consider an FLP owning an apartment building. If a tenant is injured and sues, the FLP owning the building would be sued, keeping the personal assets of the partners safe. Furthermore, FLPs can be beneficial for high-net-worth families with estate tax considerations.
Planning for Business Succession and Estate Matters
As a small business owner, it is imperative to have an exit strategy. One popular method among business partners is the deployment of a buy-sell agreement.
The partners agree on the value of a share in the business. For estate planning, partners take out life insurance policies on each other, reflecting the agreed value of a business share. Upon a partner’s demise, the insurance proceeds would be used to purchase the share from the deceased partner’s estate. Buy-sell agreements can also be employed for exit planning without life insurance.
Retirement Plans for Small Business Owners
Unlike employees in larger corporations with access to 401(k) plans, small business owners need to explore other retirement options. However, there are viable alternatives for them and their workforce.
Options like self-employed 401(k) plans, Simplified Employee Pension Plans (SEP IRAs), and Savings Incentive Match Plan for Employees (SIMPLE IRAs) are perfect if you have a handful of employees. SIMPLE IRAs can cater to businesses employing up to 100 individuals.
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Our doors are open if you are ready to work with a Phoenix, AZ estate planning lawyer to put a plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 888-222-1328.